The Doomsday Smoothing!

Wealth creation is not an art form, it’s a Science. And Science can only work, when you take the time to understand, how it does, what it does. The old saying that mastering the market is easy, it’s the mind that is harder to master, is incorrect. Let’s accept it. Mastering the mind is for the saints, the non-capitalists, the mountaineers, the ones who are detached from greed. Once you are on the street, with your million - billion dollars portfolio, your mind is engaged with the burn. You may choose not to look at it, but it’s impossible to get your mind off that doomsday scenario. This is why you need Science. You need education. You need machines.

To book or not to book a loss question won’t have disturbed your sleep if you were invested in a portfolio of portfolios. Let’s assume, you have learned the need for diversification, the risks of an all-tech portfolio, and the damage from the unicorn horns. And now that you are open to commodities, emerging markets, alternative energy, liquid large cap, some WEB 3 allocation is not lost on you and you have come to terms that recklessness is not for you, let’s break some good news for you.?

Good News!

1] Market can only fall by 90%. And if your ARK innovation fund is already down 61.8%, it is almost there. There is not much left to salvage. Above that, you don’t have the mental acumen to beat Warren, the tools to anticipate and predict which of your fall angels will rise from the ashes, and the time to keep up with the news. When you accept that you are no superman/superwoman, you maybe be ready for the second good news.

2] Doomsday can be smoothed if you start appreciating longer-term non-interfering portfolio investing. The 56.47% maximum drawdown that happened in S&P 500 in the last 22 years, looks a lot different if you smooth out the noise over a 3-year rolling period. The worst 3-year rolling return in the S&P 500 was not in 2008 but in December 2002 at a negative 13.62%. The Dec 2008 numbers at negative 9% might look unbelievable. Systematic processes, portfolio of portfolios and a touch me not approach for 2 to 3 years and more goes a long way in preserving portfolio value.

3] When you use the Exceptional & Rich U.S. 500 zero management fee, open index method, you could have potentially emerged out of the 2008 crash in December of 2008 with a minimal negative 2.62% loss. This incidentally was the only negative drawdown period in 22 years. Even the 2 years rolling returns drawdowns were not dramatic. Dec 2008 was the worst case, but still at a negative 13%. Yes, this does look too good to be true. But then how much can an open, not concentrated method, that buys the same 500 stocks, passively, diverge negatively vs. a concentrated and risk amplifying S&P 500?

Figure 1 - 3 Year Annualized Rolling Returns of the E&R U.S. 500 benchmarked against the S&P 500.

Figure 2 - 2 Year Annualized Rolling Returns of the E&R U.S. 500 benchmarked against the S&P 500.

The real test for any Smart Beta model [A new way to build the Index] should be the doomsday scenario. How deep did your model get doomed? And how fast did it recover and resurrect itself back? This is what we call recovery ratio, a measure you won’t find out there on your mutual fund factsheet, but on the AlphaBlock website. We will come back to the metric later. Let’s now enjoy the doomsday scenario.

Create or map your doomsday beating E&R U.S. 500 portfolio today. And check our Sandbox for codebase and analytics. Learn Machine Investing.

AlphaBlock Team